Krispy Kreme, Inc. (DNUT) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read together with our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This section of the Annual Report on Form 10-K generally discusses fiscal 2021 and fiscal 2020 items and year-to-year comparisons of fiscal 2021 to fiscal 2020. Discussions of fiscal 2019 items and year-to-year comparisons of fiscal 2020 and fiscal 2019 are not included in this Annual Report on Form 10-K and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on our IPO Prospectus dated June 30, 2021 filed with the U.S. Securities and Exchange Commission. This discussion contains forward-looking statements that involve risks and uncertainties. The words “believe,” “may,” “could,” “will,” “should,” “would,” “anticipate,” “estimate,” “expect,” “intend,” “objective,” “seek,” “strive” or similar words, or the negative of these words, identify forward-looking statements. Such forward-looking statements are based on certain assumptions and estimates that we consider reasonable but are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial conditions, business, prospects, growth strategy and liquidity. Accordingly, there are, or will be, important factors that could cause our actual results to differ materially from those indicated in these statements including, without limitation, those described under the heading “Risk Factors” in this Annual Report on Form 10-K. The inclusion of this forward-looking information should not be regarded as a representation by us that the future plans, estimates or expectations contemplated by us will be achieved. Our actual results could differ materially from the forward-looking statements included herein. These forward-looking statements are made only as of the date of this document, and we do not undertake any obligation, other than as may be required by applicable law, to update or revise any forward-looking or cautionary statement to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, or changes in future operating results over time or otherwise.

General

Krispy Kreme is one of the most beloved and well-known sweet treat brands in the world. Our iconic Original Glazed doughnut is universally recognized for its hot-off-the-line, melt-in-your-mouth experience. Krispy Kreme operates in over 30 countries through its unique network of fresh Doughnut Shops, partnerships with leading retailers, and a rapidly growing Ecommerce and delivery business. Our purpose of touching and enhancing lives through the joy that is Krispy Kreme guides how we operate every day and is reflected in the love we have for our people, our communities, and the planet.

We operate and report financial information on a 52 or 53-week fiscal year ending on the Sunday closest to December 31. Fiscal year 2021 reflects our results of operations for the 52-week period ended January 2, 2022. Fiscal year 2020 reflects our results of operations for the 53-week period ended January 3, 2021. The additional week in a 53-week fiscal year is added to the fourth fiscal quarter, resulting in a 14-week quarter.

We conduct our business through the following three reported segments:

•U.S. and Canada: Includes all our Company-owned operations in the U.S. and Canada, including our Krispy Kreme and Insomnia Cookies-branded shops, DFD and our Branded Sweet Treat Line;

•International: Includes all our Krispy Kreme Company-owned operations in the U.K., Ireland, Australia, New Zealand and Mexico; and

•Market Development: Includes franchise operations across the globe, as well as the Company-owned operations in Japan.

The following table presents a summary of our financial results for the periods presented:

1.Refer to “Key Performance Indicators and Non-GAAP Measures” below for more information as to how we define and calculate Adjusted EBITDA and Adjusted Net Income and for a reconciliation of Adjusted EBITDA and Adjusted Net Income to net loss, the most comparable GAAP measure.

We generated 12.5% and 1.2% organic revenue growth in fiscal 2021 and fiscal 2020, respectively.

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Significant Events and Transactions

Executing on our Transformation Strategy

As a key component of our strategy to convert markets into fully implemented Hub and Spoke models, we continue to add quality points of access across our global network. In fiscal 2021, we added over 2,000 points of access from the fiscal year ended January 3, 2021, with 386 points of access added in the fourth quarter of fiscal 2021 alone. The primary driver of the increased points of access from fiscal 2020 was the continued expansion of our DFD network in alignment with our transformation strategy. In comparison to fiscal 2020, we added 1,995 DFD Doors globally, including 1,067 DFD Doors to the U.S. and Canada segment (including expansion in major markets such as Chicago, Dallas, Phoenix, Los Angeles, and Denver), 502 to the International segment, and 426 to the Market Development segment.

The increase in DFD Doors is the result of our focus on executing our omni-channel strategy to drive our transformation. As highlighted by the more developed model within the International segment, which has experienced a quick recovery from the impacts of the COVID-19 pandemic, the capital-efficient Hub and Spoke distribution model provides a route to market and powers profitability. In fiscal 2021, our Krispy Kreme U.S. and Canada business has completed the conversion of the last few designated market areas from our legacy wholesale business to DFD, allowing us to focus on DFD expansion in priority areas. We expect DFD growth to continue to be one of our most significant drivers of profitability growth, through both increased door count and growth in average revenue per door per week (“APD”) which has risen over 55% for the Krispy Kreme U.S. and Canada business in the fourth quarter of fiscal 2021 compared to the fourth quarter of fiscal 2020. Due in part to the DFD growth efforts, International Sales per Hub grew 42% in fiscal 2021, while U.S. and Canada Sales per Hub grew 14%.

Increasing Our Global Presence

Another of our key strategic initiatives is to increase our global presence as we become the most loved sweet treat brand in the world. We expanded our presence to 31 countries in fiscal 2021, which included opening our first shop in Egypt in August 2021. Approximately 50% of our system-wide sales (Company-owned and franchise) are international and more than 50% of our Adjusted EBITDA derives from our International and Market Development segments, highlighting the beneficial impacts of global expansion and the resulting increase in profitability and brand reach. Additionally, in October 2021 we initiated our Company-owned expansion strategy in Canada by acquiring a 60% ownership interest in ten franchise shops.

Going forward, we expect to open in at least three new countries a year, with a key focus in Western Europe and select Asian and South American countries. We have recently signed new franchise agreements with plans to open Krispy Kreme-branded shops in Costa Rica, Jordan and Switzerland in fiscal 2022 or 2023, and we expect to have further announcements throughout the year as we grow our global business.

COVID-19 Update

As of the end of fiscal 2021, approximately 99% of global system-wide shops (includes Company-owned and franchise shops) were operational. In the U.S. and Canada, all Krispy Kreme and all Insomnia Cookies shops were operational with certain locations facing temporary challenges to shop operating hours due to staffing challenges amid rising COVID-19 cases. The International segment continued to perform strongly with all shops in the U.K., Ireland, Australia, New Zealand, and Mexico operational as of the end of fiscal 2021, and there was continued improvement within the Market Development segment, contributing to a trend of growth for the segment.

Key Performance Indicators and Non-GAAP Measures

We monitor the key business metrics and non-GAAP metrics set forth below to help us evaluate our business and growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts, and assess operational efficiencies. The calculation of the key business metrics discussed below may differ from other similarly titled metrics used by other companies, securities analysts, or investors.

Throughout this Annual Report on Form 10-K, we utilize “global points of access” as a key performance indicator. Global points of access reflect all locations at which fresh doughnuts or cookies can be purchased. We define global points of access to include all Hot Light Theater Shops, Fresh Shops, Carts and Food Trucks, DFD Doors, Cookie Shops, and other defined points at both Company-owned and franchise locations as of the end of the respective reporting period. We monitor global points of access as a metric that informs the growth of our omni-channel presence over time and believe this metric is useful to investors to understand our footprint in each of our segments and by asset type.

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The following table presents our global points of access, by segment and type, as of the end of fiscal 2021, fiscal 2020, and fiscal 2019:

1.Excludes Branded Sweet Treat Line distribution points and legacy wholesale business doors.

2.Includes points of access that were acquired from franchisees in the U.S. and Canada. These points of access were previously included in the Market Development segment prior to the respective acquisition dates. See Note 2, Acquisitions, to the audited Consolidated Financial Statements for further information.

3.Beginning in the third quarter of fiscal 2021, we include Carts and Food Trucks in our calculation of global points of access. Carts and Food Trucks are non-producing, mobile (typically on wheels) facilities without walls or a door where product is received from a Hot Light Theater Shop or Doughnut Factory. They are primarily found in international locations, in airports, train stations, etc. Comparative data has been included in all periods presented above.

4.DFD Doors for both the U.S. and Canada and Market Development segments exclude legacy wholesale doors, which have been declining consistent with our strategy to evolve our legacy wholesale business to focus on the DFD model and our Branded Sweet Treat Line. As of January 3, 2021, and December 29, 2019, the legacy wholesale doors were 1,508 and 4,693 for the U.S. and Canada segment, respectively, and 187 and 1,919 for the Market Development segment, respectively. As of the end of the second quarter of fiscal 2021 legacy wholesale doors for the U.S. and Canada and the Market Development segments were substantially eliminated.

5.Includes locations in Japan, which were acquired in December 2020 and are now Company-owned. All remaining points of access in the Market Development segment relate to our franchise business. As of January 2, 2022, there were four Hot Light Theater Shops, 48 Fresh Shops and 105 DFD Doors in Japan operating. As of January 3, 2021, there were three Hot Light Theater Shops, 40 Fresh Shops and 24 DFD Doors in Japan operating.

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As of January 2, 2022, we had 10,427 global points of access, with 1,810 Krispy Kreme and Insomnia Cookies-branded shops, 34 Carts and Food Trucks, and 8,583 DFD Doors. During fiscal 2021, we added a net 2,111 global points of access, with a net 112 additional shops globally, including six Hot Light Theater Shops, 80 Fresh Shops, and 26 Insomnia Cookie Shops. The Hot Light Theater Shop openings included expansion in Hilliard, OH and Lakeland, FL for the U.S. and Canada segment, Boca del Rio, Mexico for the International segment, and Cairo, Egypt for the Market Development segment which represents our first franchise shop in Egypt, increasing our global presence to 31 countries. We plan to continue adding new locations and expanding our Ecommerce and delivery platform in order to extend the availability of our products.

We also utilize “Hubs” as a key performance indicator. Our transformation is driven by the implementation of an omni-channel strategy to reach more consumers where they are and drive revenue growth, and this strategy is supported by a capital-efficient Hub and Spoke distribution model that provides a route to market and powers profitability. Our Hot Light Theater Shops and Doughnut Factories serve as centralized production facilities (“Hubs”). From these Hubs, we deliver doughnuts to our Fresh Shops, Carts and Food Trucks, and DFD Doors (“Spokes”) through an integrated network of Company-operated delivery routes, ensuring quality and freshness. Specific to the U.S. and Canada segment, certain legacy Hubs have not historically had Spokes. Many Hubs in the U.S. and Canada segment are being converted to add Spokes while certain legacy Hubs will never have the ability or need to add Spokes.

The following table presents our Hubs, by segment and type, as of the end of fiscal 2021, fiscal 2020, and fiscal 2019, respectively:

1.Includes only Hot Light Theater Shops and excludes Mini Theaters. A Mini Theater is a Spoke location that produces hot doughnuts.

Non-GAAP Measures

We report our financial results in accordance with generally accepted accounting principles in the U.S. (“GAAP”); however, management evaluates our results of operations using, among other measures, organic revenue growth, adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”), and Adjusted Net Income as we believe these non-GAAP measures are useful in evaluating our operating performance.

These non-GAAP financial measures are not universally consistent calculations, limiting their usefulness as comparative measures. Other companies may calculate similarly titled financial measures differently than we do or may not calculate them at all. Additionally, these non-GAAP financial measures are not measurements of financial performance under GAAP. In order to facilitate a clear understanding of our consolidated historical operating results, you should examine our non-GAAP financial measures in conjunction with our historical Consolidated Financial Statements and notes thereto included in this Annual Report on Form 10-K.

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Organic Revenue Growth

We define “organic revenue growth” as the growth in revenues, excluding (i) acquired shops owned by us for less than twelve months following their acquisition, (ii) the impact of foreign currency exchange rate changes, and (iii) the impact of revenues generated during the 53rd week for those fiscal years that have a 53rd week based on our fiscal calendar defined in the “Overview” section. See “Results of Operations” for our organic growth calculations for the periods presented.

Adjusted EBITDA and Adjusted Net Income

We define “Adjusted EBITDA” as earnings before interest expense, net (including interest payable to related parties), income tax expense/(benefit), and depreciation and amortization, with further adjustments for share-based compensation, certain strategic initiatives, acquisition and integration expenses, and other certain non-recurring, infrequent or non-core income and expense items. Adjusted EBITDA enables operating performance to be reviewed across reporting periods on a consistent basis and is one of the principal measures used by management to evaluate and monitor our operating performance.

We define “Adjusted Net Income” as net loss adjusted for interest expense – related party, share-based compensation, certain strategic initiatives, acquisition and integration expenses, amortization of acquisition-related intangibles, the tax impact of adjustments and other certain non-recurring, infrequent or non-core income and expense items.

Adjusted EBITDA and Adjust Net Income have certain limitations, including adjustments for income and expense items that are required by GAAP. In evaluating these non-GAAP measures, you should be aware that in the future we will incur expenses that are the same as or similar to some of the adjustments in this presentation, such as share-based compensation. Our presentation of Adjusted EBITDA and Adjusted Net Income should not be construed to imply that our future results will be unaffected by any such adjustments. Management compensates for these limitations by relying on our GAAP results in addition to using Adjusted EBITDA and Adjusted Net Income supplementally.

The following tables present a reconciliation of net loss to Adjusted EBITDA and net loss to Adjusted Net Income for the periods presented:

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1.Consists of interest expense related to the Related Party Notes which were paid off in full during the second quarter of fiscal 2021.

2.Primarily foreign translation gains and losses in each period.

3.Consists of pre-opening costs related to our New York City flagship Hot Light Theater Shop opening, including shop design, rent, and additional consulting and training costs incurred and reflected in selling, general and administrative expenses.

4.Consists mainly of consulting and advisory fees, personnel transition costs, and network conversion and set-up costs related to the transformation of the Company’s legacy wholesale business in the U.S.

5.Consists of acquisition and integration-related costs in connection with the Company’s business and franchise acquisitions, including legal, due diligence, consulting and advisory fees incurred in connection with acquisition-related activities for the applicable period.

6.Includes lease termination costs, impairment charges, and loss on disposal of property, plant and equipment.

7.Fiscal 2021 consists of severance and related benefits costs associated with the Company’s realignment of the Company Shop organizational structure to better support the DFD and Branded Sweet Treat Line businesses. Fiscal 2019 consists of severances and related benefits costs associated with our hiring of a new global management team.

8.Includes consulting and advisory fees incurred in connection with preparation for and execution of the Company’s IPO.

9.Fiscal 2021 consists primarily of legal expenses incurred outside the ordinary course of business on matters described in Note 14, Commitments and Contingencies, to the audited Consolidated Financial Statements. Fiscal 2020 consists primarily of fixed asset and impairment expenses, net of a gain on the sale of land, as well as $1.2 million of management fees paid to JAB. Fiscal 2019 includes $3.1 million lease impairment expenses related to our Winston-Salem office location incurred in connection with our corporate headquarters relocation to Charlotte, North Carolina.

10.Consists of amortization related to acquired intangible assets as reflected within depreciation and amortization in the Consolidated Statements of Operations.

11.Includes interest expense and debt issuance costs incurred and recognized as expenses in connection with the extinguishment of the KKI Term Loan Facility within four business days of receipt of the net proceeds from the IPO.

12.Consists of the write-off of debt issuance costs in connection with the refinancing of the 2016 credit facility.

13.Tax impact of adjustments calculated applying the applicable statutory rates. The Company’s adjusted effective tax rate is 22.4%, 25.2%, and 41.0% for each of the fiscal years 2021, 2020, and 2019, respectively. Fiscal 2021 includes the impact of disallowed executive compensation expense incurred in connection with the IPO. The adjusted effective tax rate in fiscal 2019 was higher compared to fiscal 2020 and fiscal 2021 due to the recording of an uncertain tax position of $12.0 million in the fourth quarter of fiscal 2019.

14.Fiscal 2021 consists primarily of the effect of tax law changes on existing temporary differences. Fiscal 2020 and fiscal 2019 include valuation allowances of $20.5 million and $6.6 million, respectively, associated with tax attributes primarily attributable to incremental costs removed from the calculation of Adjusted Net Income.

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Sales Per Hub

In order to measure the effectiveness of our Hub and Spoke model, we use “Sales per Hub” on a trailing four-quarter basis, which includes all revenue generated from a Hub and its associated Spokes. Sales per Hub equals Fresh Revenues from Hubs with Spokes, divided by the average number of Hubs with Spokes during the period. Fresh Revenues include product sales generated from our Doughnut Shop business (including Ecommerce and delivery), as well as DFD sales, but excluding sales from our legacy wholesale business and our Branded Sweet Treat Line. It also excludes all Insomnia Cookies revenues as the measure is focused on the Krispy Kreme business. The average number of Hubs with Spokes for a period is calculated as the average of the number of Hubs with Spokes at the end of the five most recent quarters.

Sales per Hub was as follows for each of the periods below:

1.Includes legacy wholesale business revenues and Branded Sweet Treat Line revenues.

2.Includes Insomnia Cookies revenues and Fresh Revenues generated by Hubs without Spokes.

3.Total International net revenues is equal to Fresh Revenues from Hubs with Spokes for that business segment.

In our International segment, where the Hub and Spoke model is most developed, Sales per Hub reached $9.1 million, up from $6.4 million in the fiscal year 2020, and also up from pre-pandemic levels of $8.3 million in the fiscal year 2019. International illustrates the benefits of leveraging our Hub and Spoke model in the most efficient way to grow the business, as shown by the International segment’s quick recovery from the impacts of the COVID-19 pandemic and growth in profit margins. In the U.S. and Canada, we reached Sales per Hub of $4.0 million, up from $3.5 million in the fiscal year 2020 and up from $3.2 million at the beginning of our transformation in 2019. U.S. and Canada growth was driven by our efforts to increase the number of DFD Doors served by our Hubs and to increase APD for the DFD Door portfolio, as the segment makes progress toward optimizing the model to look more like International. As we further extend the Hub and Spoke model into existing and new markets around the world, we expect to see this measure continue to grow.

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Results of Operations

The following comparisons are historical results and are not indicative of future results which could differ materially from the historical financial information presented.

Fiscal Year ended January 2, 2022 compared to the Fiscal Year ended January 3, 2021

The following table presents our audited consolidated results of operations for fiscal 2021 and fiscal 2020:

Product sales: Product sales increased $268.4 million, or 24.7%, from fiscal 2020 to fiscal 2021. Approximately $126.2 million of the increase in product sales was attributable to shops acquired from franchisees.

Royalties and other revenues: Royalties and other revenues decreased $6.0 million, or 16.3%, from fiscal 2020 to fiscal 2021, reflecting the impact of franchise acquisitions including KK Japan during the fourth quarter of fiscal 2020, U.S. franchises during the second half of fiscal 2020 and the first quarter of fiscal 2021, and Krispy K Canada, Inc. (“KK Canada”) during the fourth quarter of fiscal 2021.

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The following table presents a further breakdown of total net revenue and organic revenue growth by segment for the periods indicated:

Total net revenue growth of $262.4 million, or approximately 23.4%, was partially offset by one less week of sales of $20.5 million when compared to fiscal 2020. Organic revenue growth of $137.5 million, or approximately 12.5%, was driven by the continued and successful execution of our growth strategy and transformation deploying our omni-channel approach globally. We have continued to increase availability through new points of access, particularly the expansion of Spokes, including DFD Doors, for existing Hubs with Spokes during fiscal 2021.

U.S. and Canada segment growth, which reflects franchise acquisitions (51 shops in the second half of fiscal 2020, 17 shops in the first quarter of fiscal 2021, and ten shops in the fourth quarter of fiscal 2021), was also driven by strong organic revenue growth. U.S. and Canada net revenue grew $145.7 million, or approximately 18.6% from fiscal 2020 to fiscal 2021 while organic revenue grew $41.9 million, or approximately 5.5%, from fiscal 2020 to fiscal 2021, driven by our omni-channel model, primarily the strength of DFD, as well as strong growth from Insomnia Cookies. Our strategic expansion of the DFD programs contributed to organic revenue growth with added points of access as well as strengthened APD which has risen over 55% in the fourth quarter of fiscal 2021 compared to the fourth quarter of fiscal 2020. Organic growth was also aided by our successful adaptation to changing consumer behavior in response to the COVID-19 pandemic (which heavily impacted the segment during the first fiscal quarter of 2020), including expansion of Ecommerce and delivery channels. Organic growth was partially offset by a $98.8 million withdrawal in revenue from our legacy wholesale business, reflecting the evolution of the DFD business and the discontinuance of certain legacy extended shelf-life products sold through that channel. Excluding the impact of exiting the legacy wholesale business, U.S. and Canada organic growth was 18.3% for the year.

Our International segment net revenue grew $102.8 million, or approximately 44.7%, from fiscal 2020 to fiscal 2021. International organic revenue grew $83.7 million or approximately 36.9%, from fiscal 2020 to fiscal 2021, driven mainly by successfully leveraging our Hub and Spoke model with added points of access while lapping a previous year which was negatively impacted by COVID-19. Organic growth for the period was also driven by successful limited time offerings and an increased leverage of DFD channels, including DFD Door and APD growth.

Our Market Development segment net revenue grew $13.8 million, or approximately 12.7%, from fiscal 2020 to fiscal 2021 driven mainly by the acquisition of KK Japan in the fourth quarter of fiscal 2020. Market Development organic revenue grew $11.8 million, or approximately 11.0%, from fiscal 2020 to fiscal 2021, primarily driven by improved market conditions for international franchise locations as COVID-19 restrictions in certain key markets began to ease.

Product and distribution costs (exclusive of depreciation and amortization): Product and distribution costs increased $43.2 million, or 13.9%, from fiscal 2020 to fiscal 2021, largely in line with and attributable to the same factors as our revenue growth.

Product and distribution costs as a percentage of revenue decreased by approximately 210 basis points from 27.7% in fiscal 2020 to 25.6% in fiscal 2021. This margin improvement was primarily driven by the U.S. and Canada segment, which benefited from higher margins from its DFD business due to the shift to fresh doughnut sales from the legacy wholesale business. In addition, margins improved as a result of the sales mix shift due to the impact of franchise acquisitions.

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Operating expenses: Operating expenses increased $142.2 million, or 29.1%, from fiscal 2020 to fiscal 2021, driven mainly by franchise acquisitions and labor investments.

Operating expenses as a percentage of revenue increased approximately 200 basis points, from 43.5% in fiscal 2020 to 45.5% in fiscal 2021, driven mainly by the impact of franchise acquisitions such as KK Japan, U.S. franchises, and KK Canada, which resulted in additional operating expenses which are needed to run Company-owned operations versus franchises. Additionally, we have incurred higher labor costs in part due to labor needed to support the Hub and Spoke model transformation as well as our expansion of DFD points of access and labor investments as a result of the current labor markets around the world.

Selling, general and administrative expense: Selling, general and administrative (SG&A) expenses increased $40.1 million, or 22.0%, from fiscal 2020 to fiscal 2021. The increase was driven mainly by an increase in cost related to the completion of our IPO ($14.5 million), increased share-based compensation expense related to the accelerated vesting of certain employee restricted stock units in conjunction with the IPO (as well as the re-loading of executive units and stock options during the second quarter of fiscal 2021), and by SG&A expenses incurred related to the impact of franchise acquisitions. As a percentage of revenue, SG&A decreased by approximately 10 basis points, from 16.2% in fiscal 2020 to 16.1% in fiscal 2021, primarily due to economies of scale from our top-line revenue growth.

Marketing expenses: Marketing expenses increased $5.5 million, or 16.1%, primarily driven by spend associated with the increased revenues during the year.

Pre-opening costs: Pre-opening costs decreased $6.0 million, or 51.9%, from fiscal 2020 to fiscal 2021, primarily driven by $3.6 million costs associated with our expansion in NYC including expenses incurred as we prepared for the opening of our NYC flagship Hot Light Theater Shop in the second half of fiscal 2020.

Other (income)/expenses, net: Other income, net of $10.1 million in fiscal 2021 was primarily driven by a gain on a sale-leaseback transaction in the fourth quarter of fiscal 2021 of $8.7 million described in Note 8, Leases, to the audited Consolidated Financial Statements, as well as $3.5 million related to one-time COVID-19 related business interruption insurance proceeds for KKUK in the first quarter of fiscal 2021.

Depreciation and amortization expense: Depreciation and amortization expense increased $21.2 million, or 26.4%, from fiscal 2020 to fiscal 2021 primarily driven by the impact of acquired franchises and depreciation resulting from increased capital expenditures. Depreciation and amortization expenses as a percentage of revenue remained relatively consistent year-over-year.

Interest expense, net: Interest expense, net decreased $2.1 million, or 6.1%, from fiscal 2020 to fiscal 2021, primarily reflecting the decline in the one-month LIBOR rate in fiscal 2021 for our unhedged variable-rate debt. Interest expense, net is expected to continue to decline as we reduce our leverage ratio. See “Capital Resources and Liquidity.”

Interest expense – related party: Interest expense with related parties decreased $12.1 million, or 53.8%, from fiscal 2020 to fiscal 2021, driven by paying off our Related Party Notes in full with KK GP during the second quarter of fiscal 2021.

Other non-operating expense/(income), net: Other non-operating expense, net of $2.2 million in fiscal 2021 was primarily driven by realized and unrealized foreign currency transaction losses.

Income tax expense: Income tax expense increased $1.6 million, or 17.9%, from fiscal 2020 to fiscal 2021. During fiscal 2021, income tax expense was significantly impacted by disallowed executive compensation expense incurred in connection with the IPO, tax law changes, and the mix of pre-tax earnings between different jurisdictions. During fiscal 2020, income tax expense was significantly impacted by the recording of a valuation allowance against state net operating loss carryforwards and federal tax credits as well as the mix of pre-tax earnings between different jurisdictions.

Net income attributable to noncontrolling interest: Net income attributable to noncontrolling interest increased $6.3 million, or 187.5%, from fiscal 2020 to fiscal 2021, reflecting stronger earnings allocated to the shareholders of consolidated subsidiaries, particularly Insomnia Cookies, WKS Krispy Kreme, and KKUK.

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Results of Operations by Segment – Fiscal Year ended January 2, 2022 compared to the Fiscal Year ended January 3, 2021

The following table presents Adjusted EBITDA by segment for the periods indicated:

1.Refer to “Key Performance Indicators and Non-GAAP Measures” above for a reconciliation of Adjusted EBITDA to net loss.

U.S. and Canada Adjusted EBITDA increased $16.0 million, or 17.5%, from fiscal 2020 to fiscal 2021, primarily driven by the revenue growth of 18.6%. Our strategic expansion of the DFD business as part of the Hub and Spoke transformation contributed to this growth with over 1,000 added points of access during fiscal 2021. The increase in EBITDA was also driven by our Insomnia Cookies business which had a strong year aided by the return of activity to college campuses compared to fiscal 2020. Adjusted EBITDA margin for fiscal 2021 was 11.6% which was essentially flat with margin for fiscal 2020, as we experienced increased near-term costs such as commodity, labor, and wage pressures, as well as increased occupancy costs associated with rents in NYC. To help offset increasing commodity and labor costs, we successfully implemented prices increases during the third and fourth quarters of fiscal 2021.

International Adjusted EBITDA increased $36.9 million, or 82.7%, from fiscal 2020 to fiscal 2021, primarily driven by revenue growth of 44.7% due to DFD expansion and widespread impacts of the COVID-19 pandemic on our international markets during fiscal 2020, particularly in the U.K. and Ireland. Adjusted EBITDA margin for fiscal 2021 was 24.5%, an increase of 510 basis points compared to fiscal 2020, as revenue growth significantly out-paced expense growth, leading to higher margins consistent with these more established Hub and Spoke markets. We expect the International segment to continue to contribute to strong EBITDA performance as the markets have rebounded well to match or exceed their performance prior to the pandemic.

Market Development Adjusted EBITDA increased $1.8 million, or 4.5%, from fiscal 2020 to fiscal 2021 driven mainly by improved market conditions for international franchise locations as COVID-19 restrictions in certain key markets continued to ease.

Corporate Adjusted EBITDA decreased $12.1 million, or 40.7% from fiscal 2020 to fiscal 2021, primarily driven by an increase in costs associated with our operation as a public company.

Capital Resources and Liquidity

Our principal sources of liquidity to date have included cash from operating activities, cash on hand, amounts available under our credit facility, and commercial trade financing including our “Supply Chain Financing Program” or the “SCF Program.” Our primary use of liquidity is to fund the cash requirements of our business operations, including working capital needs, capital expenditures, acquisitions and other commitments.

Our future obligations primarily consist of our debt and lease obligations, as well as commitments under ingredient and other forward purchase contracts. As of January 2, 2022, we had the following future obligations:

•An aggregate principal amount of $696.3 million outstanding under the 2019 Facility;

•Non-cancellable future minimum operating lease payments totaling $722.6 million;

•Non-cancellable future minimum finance lease payments totaling $39.9 million; and

•Purchase commitments under ingredient and other forward purchase contracts of $132.4 million.

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Refer to Note 7, Long-Term Debt, Note 8, Leases, and Note 14, Commitments and Contingencies, to the audited Consolidated Financial Statements for more information.

We had cash and cash equivalents of $38.6 million and $37.5 million as of January 2, 2022 and January 3, 2021, respectively. We believe that our existing cash and cash equivalents and debt facilities will be sufficient to fund our operating and capital needs for at least the next twelve months. In fiscal 2022, we expect to use our available cash to support and invest in the growth of our core businesses, including investing in new ways to serve our consumers and support our shop partners, increasing our omnichannel presence as we increase the expansion of DFD Doors in priority areas, as well as investing in new shop openings and new market penetration within the U.S. and internationally. Total capital expenditures for fiscal 2022 are expected to be in the range of $115 million to $120 million, with our focus on deploying the capital-efficient Hub and Spoke model to reduce capital expenditures as a percentage of revenues. We also expect to continue to reduce leverage by repaying debt, as well as to continue to return cash to shareholders through common stock cash dividend payments.

Our assessment of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties. Our actual results could vary because of, and our future capital requirements will depend on, many factors, including our growth rate, the timing and extent of spending to acquire franchises, the growth of our presence in new markets and the expansion of our omni-channel model in existing markets. We may enter into arrangements in the future to acquire or invest in complementary businesses, services and technologies. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, results of operations and financial condition would be adversely affected.

Cash Flows

We generate significant cash from operations and have substantial credit availability and capacity to fund operating and discretionary spending such as capital expenditures and debt repayments. Our requirement for working capital is not significant because our consumers pay us in cash or on debit or credit cards at the time of the sale and we are able to sell many of our inventory items before payment is due to the vendor of such items. The following table and discussion present, for the periods indicated, a summary of our key cash flows from operating, investing and financing activities:

Cash Flows Provided by Operating Activities

Cash provided by operations totaled $141.2 million for fiscal 2021, an increase of $112.5 million compared with fiscal 2020. Cash provided by operations increased primarily due to operating results producing a smaller net loss in fiscal 2021 due in part to impacts on business operations during the COVID-19 pandemic in fiscal 2020. The increase also reflected an improvement of approximately $40.5 million in working capital management primarily as a result of changes in accounts receivable, inventories, and accounts payable and accrued liabilities balances.

We have undertaken broad efforts to improve our working capital position and cash generation, in part by negotiating longer payment terms with vendors. We have an agreement with a third-party administrator which allows participating vendors to track our payments, and if voluntarily elected by the vendor, to sell payment obligations from us to financial institutions (the “Supply Chain Financing Program” or the “SCF Program”). Our typical payment terms for trade payables range to 180 days outside of the SCF Program, depending on the type of vendors and the nature of the supplies or services. For vendors under the SCF Program, we have established payable terms ranging up to, but not exceeding, 360 days. When participating vendors elect to sell one or more of our payment obligations, our rights and obligations to settle the payables on their contractual due date are not impacted. We have no economic or commercial interest in a vendor’s decision to enter into these agreements and the financial institutions do not provide us with incentives such as rebates or profit sharing under the SCF Program. We agree on commercial terms with vendors for the goods and services procured, which are consistent with payment terms observed at other

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peer companies in the industry, and as the terms are not impacted by the SCF Program, such obligations are classified as trade payables. Our increased use of the SCF programs has continued through the end of fiscal 2021.

Cash Flows Used for Investing Activities

Cash used for investing activities totaled $153.4 million for fiscal 2021, a decrease in investment of $14.7 million compared with fiscal 2020. The decrease is primarily due to $11.1 million cash received as proceeds from a sale-leaseback transaction and $28.6 million less cash used for acquisitions in fiscal 2021, partially offset by an incremental $21.7 million of property and equipment purchases.

Cash Flows Provided by Financing Activities

Cash provided by financing activities totaled $16.1 million for fiscal 2021, a decrease of $123.3 million compared with fiscal 2020. The decrease was mainly driven by a variance of $88.2 million cash flows related to structured payables programs (net payments on structured payables of $20.8 million in fiscal 2021 compared to net proceeds from structured payables of $67.4 million in fiscal 2020), as we utilized excess cash to pay off outstanding balances. We utilize various card products issued by financial institutions to facilitate purchases of goods and services. By using these products, we may receive differing levels of rebates based on timing of repayment. The payment obligations under these card products are classified as structured payables on our Consolidated Balance Sheets and the associated cash flows are included in the financing section of our Consolidated Statement of Cash Flows.

Other highlights from fiscal 2021 included:

• Repayments of long-term debt and lease obligations (net of proceeds from the issuance of debt) of $453.7 million, which included the extinguishment of the Related Party Notes and the Term Loan Facility described further below;

• Proceeds from investments by shareholders of $701.3 million, including receipt of $527.3 million IPO proceeds net of underwriting discounts (but excluding $12.5 million capitalized offering expenses unpaid as of the end of fiscal 2021); and

• Distributions to shareholders and payments for the repurchase and retirement of common stock of $210.6 million.

Debt

Our long-term debt obligations consist of the following:

2019 Facility

On June 13, 2019, we entered into a credit agreement (the “2019 Facility”). The 2019 Facility provides for senior secured credit facilities in the form of $700.0 million in aggregate principal of term loans and $300.0 million of revolving capacity. Borrowings under the 2019 Facility are subject to an interest rate of one-month LIBOR plus 2.25% if our Total Net Leverage Ratio (as defined in the 2019 Facility) equals or exceeds 4.00 to 1.00, 2.00% if our Total Net Leverage Ratio is less than 4.00 to 1.00 but greater than or equal to 3.00 to 1.00 or 1.75% if our Total Net Leverage Ratio is less than 3.00 to 1.00, as determined under the 2019 Facility. We are required to make equal installments of 1.25% of the aggregate closing date principal amount of the term loans on the last day of each fiscal quarter. All remaining term loan and revolving loan balances are to be due five years from the initial closing date.

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Under the terms of the 2019 Facility, we are subject to a requirement to maintain a Total Net Leverage Ratio of less than 5.50 to 1.00 as of January 2, 2022, which reduces to 5.00 to 1.00 by April 2, 2023. The Total Net Leverage Ratio under the 2019 Facility is defined as the ratio of (a) Total Indebtedness (as defined in the 2019 Facility, which includes all debt and finance lease obligations) minus unrestricted cash and cash equivalents to (b) a defined calculation of Adjusted EBITDA (“2019 Facility Adjusted EBITDA”) for the most recently ended Test Period (as defined in the 2019 Facility). The 2019 Facility Adjusted EBITDA for purposes of these restrictive covenants includes incremental adjustments beyond those included in our Adjusted EBITDA non-GAAP measure. Specifically, the 2019 Facility Adjusted EBITDA definition includes pro forma impact of EBITDA to be received from new shop openings and acquisitions for periods not yet in operation, certain acquisition related synergies and cost optimization activities and incremental add-backs for pre-opening costs and for COVID-19 expenses and lost profits. Our Total Net Leverage Ratio was 2.99 to 1.00 as of the end of fiscal 2021 compared to 3.98 to 1.00 as of the end of fiscal 2020.

We were in compliance with the financial and other covenants related to the 2019 Facility as of January 2, 2022 and as of the date of this filing of our Annual Report on Form 10-K, and expect to remain in compliance over the next 12 months. If we are unable to meet the 2019 Facility financial or other covenants in future periods, it may negatively impact our liquidity by limiting our ability to draw on the revolving credit facility, could result in the lenders accelerating the maturity of such indebtedness and foreclosing upon the collateral pledged thereunder, and could require the replacement of the 2019 Facility with new sources of financing which there is no guaranty we could secure. For additional information, refer to Note 7, Long-Term Debt, to the audited Consolidated Financial Statements.

Related Party Notes

We were previously party to a senior unsecured note agreement with KK GP for an aggregate principal amount of $283.1 million. In April 2019, we entered into an additional unsecured note with KK GP for $54.0 million (such notes together, the “Related Party Notes”). As of January 3, 2021, the outstanding amount of principal and interest was $344.6 million. The Related Party Notes were paid off in full during the second quarter of fiscal 2021. The interest expense for the fiscal years ended January 2, 2022, January 3, 2021, and December 29, 2019 was $10.4 million, $22.5 million and $21.9 million, respectively. See Note 15, Related Party Transactions, to the audited Consolidated Financial Statements for more information.

Term Loan Facility

On June 10, 2021, we entered into the Term Loan Facility. On June 17, 2021, we borrowed $500.0 million under the Term Loan Facility. The borrowings under the Term Loan Facility bore an all-in interest rate of 2.68175%. As of January 2, 2022, there was no outstanding principal amount under the Term Loan Facility, as it was paid off in full and terminated on July 7, 2021, primarily using the net IPO proceeds with the difference being partially funded by a drawdown of $100.0 million on the 2019 Facility’s revolving credit facility. The Term Loan Facility would have matured on the earlier of (i) June 10, 2022, and (ii) within four business days following consummation of the IPO. The interest expense was $2.4 million for the fiscal year ended January 2, 2022, which included $1.7 million of debt issuance costs incurred and recognized as expenses. For additional information, refer to Note 7, Long-Term Debt, to the audited Consolidated Financial Statements.

Critical Accounting Estimates

The financial information discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based upon or derived from the audited Consolidated Financial Statements, which have been prepared in conformity with GAAP. The preparation of the financial statements requires the use of judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as related disclosures. We consider an accounting judgment, estimate or assumption to be critical when (1) the estimate or assumption is complex in nature or requires a high degree of judgment and (2) the use of different judgments, estimates and assumptions could have a material impact on the audited Consolidated Financial Statements.

On an ongoing basis, we evaluate our estimates and judgments based on historical experience and various other factors that are believed to be reasonable under the circumstances. We review our financial reporting and disclosure practices and accounting policies quarterly to confirm that they provide accurate and transparent information relative to the current economic and business environment. A summary of our significant accounting policies is included in Note 1, Description of Business and Summary of Significant Accounting Policies, to the audited Consolidated Financial Statements. We believe that our critical accounting estimates are:

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Self-Insurance Risks and Receivables from Insurers

We are subject to workers’ compensation, vehicle and general liability claims and are self-insured for a significant portion of our workers’ compensation, vehicle and general liability claims up to the amount of stop-loss insurance coverage purchased from commercial insurance carriers. We maintain accruals for the estimated cost of claims, without regard to the effects of stop-loss coverage, using actuarial methods which evaluate known open and incurred but not reported claims and consider historical loss development experience. In addition, we record receivables from the insurance carriers for claims amounts estimated to be recovered under the stop-loss insurance policies when these amounts are estimable and probable of collection. We estimate such stop-loss receivables using the same actuarial methods used to establish the related claims accruals and taking into account the amount of risk transferred to the carriers under the stop-loss policies. The stop-loss policies provide coverage for claims in excess of retained self-insurance risks, which are determined on a claim-by-claim basis. As of January 2, 2022 and January 3, 2021, the Company had approximately $14.7 million and $14.4 million, respectively, reserved for such programs. Inclusive of the receivables from the stop-loss insurance policies, the Company’s limited liability balance was $7.5 million and $7.7 million as of January 2, 2022 and January 3, 2021, respectively.

Our estimated liability is not discounted and is based on a number of assumptions and factors. The critical assumptions used in determining these related expenses and obligations are future cost projections of claims, which include healthcare cost projections. These critical assumptions are calculated based on historical Company data and experience, as well as appropriate market indicators including inflation, societal attitudes toward legal action, and changes in law. The assumptions are evaluated at least semiannually by us in conjunction with outside actuaries and are closely monitored and adjusted when warranted by changing circumstances. If a greater amount of claims are reported, or if medical costs increase beyond our expectations, our liabilities may not be sufficient, and we could recognize additional expense.

Income Taxes

Our provision for income taxes, deferred tax assets and liabilities including valuation allowance requires the use of estimates based on our management’s interpretation and application of complex tax laws and accounting guidance. We are primarily subject to income taxes in the U.S. We establish reserves for uncertain tax positions for material, known tax exposures in accordance with ASC 740 relating to deductions, transactions and other matters involving some uncertainty as to the measurement and recognition of the item. We may adjust these reserves when our judgment changes as a result of the evaluation of new information not previously available and will be reflected in the period in which the new information is available. While we believe that our reserves are adequate, issues raised by a tax authority may be resolved at an amount different than the related reserve and could materially increase or decrease our income tax provision in future periods.

Realization of deferred tax assets involves estimates regarding (i) the timing and amount of the reversal of taxable temporary differences, (ii) expected future taxable income, and (iii) the impact of tax planning strategies. We believe that it is more likely than not that we will not realize the benefit of certain deferred tax assets and, accordingly, have established a valuation allowance against them. In assessing the need for a valuation allowance, we consider all available positive and negative evidence, including past operating results, projections of future taxable income and the feasibility of and potential changes to ongoing tax planning strategies. The projections of future taxable income include a number of estimates and assumptions regarding our volume, pricing and costs. Although realization is not assured for the remaining deferred tax assets, we believe it is more likely than not that the remaining deferred tax assets will be realized through future taxable earnings or alternative tax strategies. However, deferred tax assets could be reduced in the near term if our estimates of taxable income are significantly reduced or tax strategies are no longer viable.

Goodwill and Indefinite Lived Intangible Assets

For each reporting unit, the Company assesses goodwill for impairment annually at the beginning of the fourth fiscal quarter or more frequently when impairment indicators are present. If the carrying value of the reporting unit exceeds its fair value, the Company recognizes an impairment charge for the difference up to the carrying value of the allocated goodwill. The fair value is estimated using a combination of a discounted cash flow approach and a market approach.

When assessing goodwill for impairment, our decision to perform a qualitative impairment assessment for an individual reporting unit is influenced by a number of factors, inclusive of the carrying value of the reporting unit’s goodwill, the significance of the excess of the reporting unit’s estimated fair value over carrying value at the last quantitative assessment date, the amount of time in between quantitative fair value assessments and the date of acquisition. If we perform a quantitative assessment of an individual reporting unit’s goodwill, our impairment calculations contain uncertainties because they require management to make assumptions and to apply judgment when estimating future cash flows and asset fair values, including projected revenue growth and operating expenses related to existing businesses, product innovation and new shop concepts, as

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well as utilizing valuation multiples of similar publicly traded companies and selecting an appropriate discount rate. Estimates of revenue growth and operating expenses are based on internal projections considering the reporting unit’s past performance and forecasted growth, strategic initiatives, local market economics and the local business environment impacting the reporting unit’s performance. The discount rate is selected based on the estimated cost of capital for a market participant to operate the reporting unit in the region. These estimates, as well as the selection of comparable companies and valuation multiples used in the market approaches are highly subjective, and our ability to realize the future cash flows used in our fair value calculations is affected by factors such as the success of strategic initiatives, changes in economic conditions, changes in our operating performance and changes in our business strategies, including retail initiatives and international expansion.

For the fiscal years 2021, 2020 and 2019, there were no goodwill impairment charges. We continue to believe the fair value of each of our reporting units is significantly in excess of its carrying value, and absent a sustained multi-year global decline in our business in key markets such as the U.S. and Canada, we do not anticipate incurring significant goodwill impairment in the next 12 months.

Other intangible assets, net primarily represent the trade names for our brands, franchise agreements (domestic and international), reacquired franchise rights, and customer relationships. The trade names have been assigned an indefinite useful life and are reviewed annually for impairment. The fair value calculation for the trade names includes estimates of revenue growth, which are based on past performance and internal projections for the intangible asset group’s forecasted growth and royalty rates, which are adjusted for our particular facts and circumstances. The discount rate is selected based on the estimated cost of capital that reflects the risk profile of the related business. These estimates are highly subjective, and our ability to achieve the forecasted cash flows used in our fair value calculations is affected by factors such as the success of strategic initiatives, changes in economic conditions, changes in our operating performance and changes in our business strategies, including retail initiatives and international expansion. All other intangible assets are amortized on a straight-line basis over their estimated useful lives. Definite-lived intangible assets are assessed for impairment whenever triggering events or indicators of potential impairment occur. We did not have any impairment charges of other intangible assets during any of the periods presented, and we do not anticipate incurring significant impairment charges in the next 12 months.

New Accounting Pronouncements

Refer to Note 1, Description of Business and Summary of Significant Accounting Policies, to the audited Consolidated Financial Statements for a detailed description of recent accounting pronouncements.

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